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ONGC, OIL face risk of fuel subsidy sharing: Moody’s
State-run exploration and production companies Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Limited (OIL) face the increasing risk that the government of India will once again require them to share in the country’s fuel-subsidy burden, said Moody’s Investors Service in a note released on Tuesday. “Because of the government’s widening fiscal deficit, ONGC and OIL could be asked to bear part of the Indian government’s fuel subsidy for oil, if prices stay above $60 per barrel for the fiscal year ending March 2019,” said Vikas Halan, a Moody’s senior vice president.
The two companies have since 2015 not contributed to fuel subsidies. They had, however, in previous years paid for more than 40% of the country’s annual subsidy bill. “The net impact of the subsidy sharing will be manageable for ONGC and OIL, even if the two companies are required to bear the entire shortfall between budgeted and actual amounts for the fiscal year ending March 2019,” added Halan. Moody’s added that if ONGC and OIL are obligated to contribute the entire subsidised amount exceeding the government’s budgeted figure for the fiscal year ending March 2019, such a requirement would constrain their net realised prices to $52-$56 per barrel. This is only marginally lower than or equal to the $56 for fiscal 2018.
Moody’s estimates that fuel subsidies could total Rs340-530 billion in fiscal 2019, the highest since fiscal 2015, assuming Brent crude oil prices average $60-$80 per barrel. The government has budgeted for Rs250 billion of fuel subsidies in fiscal 2019, leaving a shortfall of Rs90-280 billion. This could be met by ONGC and OIL entirely, or in part, if the government increases the budget allocation for these subsidies. According to Moody’s, the oil marketing companies—Indian Oil Corporation Ltd, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Ltd—have been asked to share less than 1% of the total fuel subsidies since fiscal 2012 and it is unlikely that the proportion will rise.
The rating agency says that the government is unlikely to reverse fuel pricing deregulation because it remains committed to reforms. However, it could intervene to address record high prices of petrol and diesel by reducing the excise duty on these products, especially if oil prices stay high. These taxes make up more than 20% of the retail selling prices and were increased in 2016 when oil prices fell. Most petroleum products are sold at market-linked prices in India, except liquefied petroleum gas and kerosene. Alexander Nylander Authentic Jersey
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